Under SEC Rule 205-3 of the Investment Advisers Act of 1940, the qualified client definition identifies investors who can be charged performance-based fees by a registered investment adviser. You become one by meeting any single test in the rule: enough money under the adviser’s management, enough net worth, status as a “qualified purchaser,” or a qualifying role at the advisory firm itself. As of early 2026, the financial bars are $1.1 million in assets under management or more than $2.2 million in net worth, though the SEC has published a notice of intent to raise both figures later in 2026.
Why the Label Exists
The Investment Advisers Act generally forbids registered advisers from taking a cut of your investment gains as compensation. An adviser who earns more when your portfolio grows has an incentive to swing for the fences with your money, and a flat or asset-based fee keeps that pressure down.
Rule 205-3 is the carve-out. If you meet the qualified client test, an adviser can charge you fees tied to performance, the arrangement used across hedge funds, private equity, and other private funds where the manager takes a share of profits. The SEC’s premise is that investors at this level have enough at stake, and enough sophistication, to evaluate those fee structures on their own.
The Four Ways to Qualify
Rule 205-3 sets out four independent paths. You only need one.
- Assets under management: at least $1.1 million with the adviser immediately after you enter the advisory contract.
- Net worth: more than $2.2 million immediately before you sign the contract, calculated under the specific rules discussed below.
- Qualified purchaser: you meet the separate definition under the Investment Company Act, which generally means owning at least $5 million in investments.
- Relationship with the adviser: you are an executive officer, director, trustee, general partner, or “knowledgeable employee” of the advisory firm.
Most individual investors qualify through the first two. The qualified purchaser path mainly matters for people already investing in funds exempt from Investment Company Act registration. The relationship path recognizes that people running or working inside the advisory firm don’t need the same protection as outside clients.
The Dollar Thresholds and the 2026 Adjustment
The current numbers, $1.1 million in assets under management and $2.2 million in net worth, took effect on August 16, 2021 after the SEC’s most recent inflation adjustment order.1U.S. Securities and Exchange Commission. Inflation Adjustments of Qualified Client Thresholds – Fact Sheet The Dodd-Frank Act requires the SEC to revisit the figures roughly every five years using the Personal Consumption Expenditures Price Index.
The next revision is pending. In March 2026, the SEC published a notice of intent to raise the thresholds to $1.4 million for the assets-under-management test and $2.7 million for the net worth test.2GovInfo. Federal Register Vol. 91, No. 61 – Notice of Intent To Issue an Order The SEC indicated the new thresholds would take effect 60 days after the final order issues.3U.S. Securities and Exchange Commission. Performance-Based Investment Advisory Fees If you’re signing a new advisory contract in 2026, whichever thresholds are in effect on the day you sign are the ones that apply.
The timing of each test is different, and the difference matters. The assets-under-management figure is measured immediately after you enter the contract, so money you’re about to place with the adviser counts. The net worth figure is measured immediately before you sign, so the adviser must confirm you already clear the bar before the relationship begins.4eCFR. 17 CFR 275.205-3 – Exemption From the Compensation Prohibition of Section 205(a) of the Act
How Net Worth Is Calculated
The net worth calculation has a few wrinkles, all involving your home.
Your primary residence does not count as an asset. This surprises people who assume home equity will push them over the threshold. The exclusion is meant to keep the test focused on investable wealth rather than the value of where you live.4eCFR. 17 CFR 275.205-3 – Exemption From the Compensation Prohibition of Section 205(a) of the Act
Mortgage debt is partially excluded to match, but only up to the home’s fair market value. If your home is worth $800,000 and you owe $600,000, both sides drop out and the net effect is zero. If you owe $900,000 on an $800,000 home, the underwater $100,000 counts as a liability against your net worth.5eCFR. 17 CFR 275.205-3 – Exemption From the Compensation Prohibition of Section 205(a) of the Act
There is also an anti-gaming rule. If you borrow against your home shortly before signing the advisory contract, through a cash-out refinance or a home equity line of credit, any increase in the mortgage balance beyond what it was 60 days earlier counts as a liability, unless the new borrowing was used to purchase the residence. The SEC added this to stop investors from pulling cash out of an excluded asset to inflate their liquid net worth right before qualifying.5eCFR. 17 CFR 275.205-3 – Exemption From the Compensation Prohibition of Section 205(a) of the Act
Spouses can combine their assets and liabilities to meet the threshold jointly. The rule permits joint net worth calculations for married couples.4eCFR. 17 CFR 275.205-3 – Exemption From the Compensation Prohibition of Section 205(a) of the Act
Qualifying Through Your Role at the Advisory Firm
Two groups connected to the advisory firm qualify regardless of personal wealth. Executive officers, directors, trustees, general partners, and anyone in a comparable role at the adviser automatically qualify.4eCFR. 17 CFR 275.205-3 – Exemption From the Compensation Prohibition of Section 205(a) of the Act
The second group is “knowledgeable employees,” staff who participate in the firm’s investment activities as part of their regular duties. The employee must have done investment-related work for at least 12 months, whether at the current firm or a prior investment firm. Purely clerical or administrative staff do not qualify, even after years on the job.5eCFR. 17 CFR 275.205-3 – Exemption From the Compensation Prohibition of Section 205(a) of the Act
Trusts, Funds, and the Look-Through Rule
The rule reaches companies, not just individuals. A trust that meets the financial thresholds on its own can enter a performance-fee arrangement the same way a person can. Pooled investment vehicles are trickier.
When a private investment company, registered investment company, or business development company enters a performance-fee contract, the adviser must look through the entity to the underlying equity owners. Each owner who will bear the performance fee has to qualify individually as a qualified client.4eCFR. 17 CFR 275.205-3 – Exemption From the Compensation Prohibition of Section 205(a) of the Act Owners who are not charged the performance fee do not need to meet the test.
The look-through is tiered. If a private fund is owned by another private fund, the adviser has to look through both layers down to the actual investors at the bottom of the chain.6U.S. Securities and Exchange Commission. Exemption To Allow Investment Advisers To Charge Fees Based Upon a Share of Capital Gains Upon or Capital Appreciation of a Client’s Account That is one reason subscription documents for private funds ask so many detailed financial questions.
What Happens When the Thresholds Go Up
When the SEC raises the dollar thresholds for inflation, existing contracts do not become invalid. If you qualified under the thresholds in effect when you signed, that contract stays valid even if you would not meet the newer, higher numbers. You do not have to requalify every adjustment cycle.4eCFR. 17 CFR 275.205-3 – Exemption From the Compensation Prohibition of Section 205(a) of the Act
The grandfathering extends to private fund investors. If you invested in a fund before the threshold increase, later investments in that same fund are evaluated under the old thresholds. Any new party joining the contract after the increase takes effect, though, is measured against the updated numbers.
With the 2026 adjustment pending, this distinction is practical. Signing before the new thresholds take effect locks you in at $1.1 million and $2.2 million. Waiting could mean you need $1.4 million and $2.7 million.
Qualified Client vs. Accredited Investor vs. Qualified Purchaser
These three labels overlap but serve different purposes and carry different bars.
An accredited investor is the most common classification. You need either $1 million in net worth (excluding your primary residence) or annual income above $200,000 individually, $300,000 jointly, for the last two years. Accredited investor status lets you participate in private securities offerings under Regulation D. It does not, on its own, authorize an adviser to charge you performance fees.
A qualified client sits in the middle. The bars are higher, currently $2.2 million net worth or $1.1 million under management, and the designation is specifically what unlocks performance-fee arrangements with registered advisers. Every qualified purchaser is automatically a qualified client, but not every qualified client is a qualified purchaser.4eCFR. 17 CFR 275.205-3 – Exemption From the Compensation Prohibition of Section 205(a) of the Act
A qualified purchaser is the highest bar. Individuals must own at least $5 million in investments (investments specifically, not net worth), and entities need $25 million.7U.S. Securities and Exchange Commission. Defining the Term Qualified Purchaser Under the Securities Act of 1933 That status opens access to 3(c)(7) funds, private funds that can accept unlimited investors because every participant is a qualified purchaser.
The takeaway is short. Being accredited alone will not qualify you for performance-fee arrangements. If your adviser wants to charge incentive fees, you have to clear the qualified client bar, whether through the financial tests, the qualified purchaser path, or a qualifying role at the firm.